What are the differences and s
What are the differences and similarities among the NewKeynesian, Monetarist and Neo-Classical models in terms oftheir predicted outcomes? How do the different assumptions of themodels result in policy debates among their respectiveadherents?
Answer:
New keynesian :Economists include Greg Mankiw , Blanchard . Markets may not be asperfect as the classical economists suggest. they stressed onimperfect competititon , coordination failure and creditrestrictions . The new keyensian approach borrows the idea of newclassical economists of rational expectations .
The new keynesian assumes that wages and prices are sticky andchange slowly (are rigid )and taht only quantity adjustment happens.
they believed that fulle mployemnet is achieved by stabilisationpolicies which are formed after various market failures.
similarity :They just like monetarsist recommend that marketproblems are fixed majorly by monetary policy but unlike them , newkyenesian also believe that some problems are fixed by fiscalpolicy .
also like one version of neo classicals they belive that wagesand prices are sticky .
Monetarist : Itis somewhare between classical and keynesiuan thought. They allowadaptive expectations but believe in fiscal policy beingineffective . also they emphasise on monetary policy being able tomanage the aggregate demand . They assumed interest sensitivity ofinvestment is very high, so IS curve isb flat . so fiscal policyleads to crowding out. Fiscal policy ubnder monetarists is unableto influence employment and output . Monetarists like classicalassume that LM curve is steep .
also they assume free market with little government intervention. The aim of monetarists is to allow money supply to grow at samepace so that the pruces remain stable or increase a little .Monetarists basically beleive in lags and long time periods inmonetray policy and thus want a constant rate of monetary policy.
similaity is that both new keynesian and monetarists believethat market problems are solved by moentary policy
Neo classical :It was developed by neoclassical economists who allowed for a shortrun with keynesian properties and long run with classical . so thisis also known as neo keynesian . It is based on three basicassumptions
people have rational preferences
individuals maximise utility and firms maximise profits
people act rationally and have full information
there are different versions of neo clssical depending on theassumption
version 1: nominal wages are rigid downwards . so there ispossibility of unemployemnt , though full employment would berestored after sometime . here they assumne rigid wages similar tonew keynesian thoughts
version 2: it allows wages to be fully flexible and expectedprice a slowly moving variable . But again the full employ,mentwould be restored de3pneding on the speed of expectationalerrors
similarity :Neo classical believed in free market with little orno government intervention which is similar to monetarist viewpoint. according to them there are no involuntary unumeployment
The assumptions of rational expectations , full information andrigid wages differ in the various thoughts which are the policydebate matters .
Monetarist Milton freidman’s fooling model was provided wherethe workers are fooled into additional input because they haveimperfect infor,mation and the firms have full information. Edmundphelps ( new keynesian ) at the same time developed theories thatboth workers and firms have imperfect information .
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